Why Did Bitcoin Legalization Fail in South America?


The Current State of South American Countries' Bitcoin Experiment

El Salvador made global headlines in 2021 by becoming the first country to adopt Bitcoin as legal tender. President Nayib Bukele promoted Bitcoin as a key element of national economic growth, with the government purchasing large amounts of the cryptocurrency. However, over time, the results have not met expectations. Observing El Salvador's case, other South American countries have become more cautious about adopting Bitcoin as legal tender, instead viewing it primarily as an investment or remittance tool.

Countries That Considered Bitcoin as Legal Tender

Following El Salvador's move, several South American countries, including Paraguay, Argentina, and Brazil, explored the possibility of adopting Bitcoin as an official means of payment. However, none of them have taken the final step to make it legal tender. The primary reason is Bitcoin's extreme volatility, which poses a significant economic risk.

Why Did These Plans Fizzle Out?

  1. High Volatility
    Bitcoin's price fluctuations make it an unstable medium of exchange. For example, El Salvador's Bitcoin holdings suffered major losses during the 2022 market downturn, creating fiscal concerns for the government. For everyday users, the constant price swings make it impractical for purchases or salary payments.

  2. Opposition from International Financial Institutions
    Global financial institutions such as the IMF and the World Bank strongly opposed Bitcoin being used as legal tender. The IMF warned El Salvador that continuing to recognize Bitcoin as legal currency could impact the country's ability to receive further financial aid.

  3. Low Adoption Among Citizens
    Despite the government’s push, most Salvadorans continued to prefer using the U.S. dollar. Businesses were reluctant to accept Bitcoin, and the government's 'Chivo Wallet' initiative saw much lower usage than anticipated. According to reports, fewer than 20% of businesses regularly used Chivo Wallet for transactions.

  4. Lack of Infrastructure
    Digital payments require a well-established internet and mobile banking system. In many South American countries, financial and technological infrastructure remains underdeveloped, making widespread Bitcoin adoption unrealistic.

How Is Bitcoin Being Used in South America Today?

While the push for Bitcoin as legal tender has faded, South American nations are increasingly utilizing it for investment and remittances.

  1. Bitcoin as a Remittance Tool

    • Venezuela: As of 2023, approximately 9% of international remittances were conducted via cryptocurrencies.
    • Brazil: The volume of crypto transactions has surged in the past few years, with Bitcoin being used frequently for remittances from the U.S.
    • In some cases, families in Argentina and Venezuela have reported preferring Bitcoin for remittances due to the stability concerns surrounding their national currencies.

  2. Bitcoin as an Investment Asset

    • In Argentina and Brazil, Bitcoin is seen as an alternative investment asset, particularly as local currencies face inflation.
    • In Brazil, the government has increased cryptocurrency regulation while institutional investors are incorporating Bitcoin into their portfolios.

  3. Increased Corporate Usage

    • Some companies in Brazil and Argentina are paying part of their employees’ salaries in Bitcoin or using it for international transactions.

Brazil's Unique Position in Crypto Investment

Brazil has emerged as a global leader in cryptocurrency investment rather than adoption as a legal currency. The country became the first in the world to approve an XRP ETF, demonstrating its commitment to crypto-related financial products. However, the Brazilian government and financial institutions treat cryptocurrencies primarily as investment assets rather than a viable alternative to traditional currency.

Conclusion

The initial enthusiasm for Bitcoin as legal tender in South America has largely faded due to volatility, financial institutional opposition, low adoption rates, and infrastructure challenges. However, Bitcoin remains a significant investment and remittance tool, particularly in economically unstable nations. As regulations evolve, it will be interesting to see how South American countries continue to integrate cryptocurrency into their financial systems.

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